Last Week’s Markets in Review: Debt Ceiling Debate Nearing Finish Line

Global equity markets finished mixed for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,205, representing an increase of 0.35%, while the Russell Midcap Index moved-1.16% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -0.02% over the week. As developed, international equity performance and emerging markets were lower returning -2.28% and -1.14%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.80%.

We hope everyone enjoyed a nice Memorial Day weekend and let us take this time to remember those brave men and women of the military who gave their lives for us. We are eternally grateful.

Most investors spent the past week continuing to closely follow the negotiations on Capitol Hill concerning the National Debt Ceiling. While the debt ceiling debate occupied most of the headlines during the week, there were other important economic data reported throughout the week as well, including the minutes from the April FOMC meeting, the first revision of first-quarter gross domestic product (GDP), and the personal consumption expenditures price index (PCE) for April.

The negotiations between the Biden Administration and the Speaker of the House of Representatives seemed very repetitive last week, with each day being composed of ongoing meetings by either the main players or their representatives. What was consistent within the reported negotiations was the fact that both sides consistently stated that a default was unacceptable and that they were interested in creating a compromise that included certain key parts of their respective agendas. Each day ended with statements that talks were productive but did not result in a deal that could be sent to Congress for a vote.

The minutes from the FOMC meeting on May 2nd and 3rd were released last Wednesday. The minutes showed that Federal Reserve officials were divided over future monetary policy. While the decision to increase the Fed’s benchmark rate by a quarter percentage point (0.25%) was unanimous, there was disagreement over what the next move should be, with a tilt toward a less aggressive policy. Several FOMC members saw slowing economic growth as Chair Powell indicated that, “Further policy firming after the meeting may not be necessary.”

Real gross domestic product (GDP) increased at an annual rate of 1.3% in the first quarter of 2023, according to the second estimate released by the Bureau of Economic Analysis (BEA) on Thursday. The second estimate was 0.2% higher than the initial estimate of GDP.
On Friday, the Bureau of Economic Analysis (BEA) also released the personal consumption expenditures price index (PCE) for April. PCE rose 0.4% for the month excluding food and energy costs, higher than the consensus estimate of 0.3%. On an annual basis, the gauge increased 4.7%, also slightly greater than expectations. The report showed that inflation continues to moderate but remains high. The report also showed that consumer spending and personal income continue to hold up relatively well.

The higher PCE results in contrast to the FOMC meeting minutes appeared to have affected market sentiment concerning future monetary policy. Utilizing the CME FedWatch Tool, the probability of a quarter-point increase at the June 14th FOMC meeting increased to 63%. Just a week prior, the probability of the same quarter-point increase at the June meeting was 25.7%.

As we expected, President Biden and House Speaker Kevin McCarthy reached a final agreement Sunday on a deal to raise the debt ceiling and worked to ensure enough support in Congress to pass the measure in the coming week, although passage is not certain at the time of this writing.
Investors should consider all the information discussed within this market update and many other factors when managing their investment portfolios. However, with so much data and so little time to digest, we encourage investors to work with experienced financial professionals to help process all this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.

Best wishes for the week ahead!

Minutes for the FOMC meeting were sourced from the Federal Reserve. GDP and PCE statistics are sourced from the Bureau of Economic Analysis. Equity Market, Fixed Income returns, and rates are from Bloomberg as of 5/26/23. Economic Calendar Data from Econoday as of 5/26/23. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.